Marine & Transit - December 2009

Adiós Rule B?

The Shipping Corporation of India Ltd v Jaldhi Pte Ltd – United States Court of Appeals, Second Circuit (Circuit Judges Feinberg, Winter and Cabranes) –  2009 WL 3319675 (2d Cir. Oct. 16, 2009)

This recent US Court of Appeals ruling has severely curtailed “Rule B” attachments of electronic fund transfers (“EFTs”) in New York for maritime and other claims.

Rule B allows claimants to freeze defendants’ assets pending a final decision in court or arbitration, regardless of the jurisdiction of the principle claim provided the defendant has attachable property within the relevant US judicial district.  A floodgate of such suits was opened seven years ago following the case of Winter Storm Shipping Ltd v TPI, 310 F 3d 263 (2nd Cir. 2002), in which the US Court of Appeals extended the application of Rule B to electronic fund transfers. Thus, funds passing momentarily through New York clearing banks became attachable property. 

However, the US Court of Appeals has now overruled the decision in Winter Storm, stating that EFTs are neither the property of the originator nor the beneficiary while briefly in the possession of an intermediary bank and as such do not fall within Rule B.  Furthermore, following the more recent decision of the US Court of Appeals on 13 November 2009 in Hawknet Limited v Overseas Shipping Agencies et al 2009 WL 1309854 (S.D.N.Y. 2009), the decision in SCI v Jaldhi Overseas is to be applied retroactively.  Therefore, pre-existing Rule B attachments of EFTs may also be set aside. 

This about-face comes as no surprise.  It is believed that Rule B law suits constituted 33% of all law suits filed in New York between October 2008 and January 2009 – an obvious burden on the clearing banks involved.  Suits were often filed speculatively by claimants merely in the hope that a defendant would engage in a dollar denominated transaction involving an EFT through a New York clearing bank during the period an attachment order was in effect. This is said to have discouraged international companies from engaging in U.S. dollar transactions or using New York banks for international agreements.  However, this relatively straightforward and effective way of obtaining security for maritime claims is no longer available. 

As a result, it is predicted the number of vessel arrests will increase dramatically as maritime claimants seek more traditional methods to secure claims, especially in arrest friendly jurisdictions such as South Africa.  However, those with assets in the United States will still need to take heed of any threatened attachment orders.  Rule B can still be used to attach ships, cargo, bunkers and other assets such as bank accounts.  Even EFTs in the hands of an intermediary bank potentially remains subject to attachment under Admiralty Rule C whenever there is a lien on the particular funds.  Under New York State law, there is also another procedure, albeit more complicated and time consuming than Rule B, which allows attachments "in aid of arbitration" in any commercial dispute including maritime claims.  In certain circumstances therefore, US attachment orders remain a viable way of obtaining security.

Weightmans’ Marine and Transit team can advise on all aspects of maritime attachments throughout the United Kingdom as well as worldwide through our network of international correspondent law firms.  Should you require advice in this respect, please contact Terry Donaghy, Mike Burns or Emma Rice.

Emma Rice, Solicitor
Weightmans LLP